Federal Taxation II: Gross Income Flashcards Preview

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Flashcards in Federal Taxation II: Gross Income Deck (29):
1

Income Recognition: Constructive Receipt

Cash basis taxpayer must include value of property in income in period when right to (or control of) property is acquired

2

Income Recognition: Tax Benefit Rule

Taxpayer must include expense reimbursement in income

1. if expense was deducted in a prior period

2. if deduction reduced taxable income.

3

Income Recognition: Claim of Right Doctrine

Taxpayer must include property in income when apparent claim to property materializes

4

Income Recognition: Assignment of Income Doctrine

Income cannot be "assigned" to someone other than party that earned it

5

Interest Income: General

Interest is income when received or accrued

6

Common Sources of Interest Income (3)

1. US Treasury notes/bonds
2. Federal and State tax refunds
3. Mortgages

7

Interest Income: Bond Premiums

Amount paid for bond is more than face value.

If amortized, basis of bond is reduced

8

Interest Income: Bond Discounts

Amount paid for bond less than face value.

Should be amortized as interest income (using effective interest rate method).

Amortization INCREASES interest income.

9

Original Issue Discount (Bonds)

Loan made requiring higher payment at maturity than amount of original loan.

Additional payment = discount (considered interest)

Often non-interest bearing.

10

Interest Income: Short-term discounts

Cash Basis: taxed at maturity as ordinary income

Accrual: reported as earned

11

Interest Income: Series EE Bonds

Interest only paid when bond matures.

Interest income not income until maturity (unless elected otherwise)

Interest can not income even at maturity if proceeds pay higher education expenses (owner is at least 24 yr old)

12

Income: Dividends on Stock

Dividend on Common Stock: Not taxable.

Dividend on Preferred Stock: Taxable.

13

Determine Taxability of Dividends (3)

1. dividend income to the extent of earnings and profits (E&P)

2. reduction in the basis of the stock

3. excess is capital gain

14

Municipal Interest

State/Local government obligations. Not Taxable.

15

Dividend Tax Rate

Qualified: Same as LTCG tax rate

Not Qualified: Taxed as regular income.

16

Alimony

Taxable to payee.

Deductible by payor.

Must be:
1. Required
2. Made in Cash
3. Paid to/on behalf of former spouse
4. Terminate upon death of recipient
5. Payor/Payee can't live together

17

Child Support

Not Taxable to payee.

Not Deductible to payor.

18

Is Compensation received for physical injury or illness taxable as income?

No, including workers comp

19

Are Damages taxable as income?

Yes, unless caused by underlying physical illness or injury

20

Are Punitive Damages Taxable as income?

Yes, including any attorney's fees recovered

21

Are annuity payments taxable as income?

Annuity rules determine the answer.

Each payment is part income/part return of capital if taxpayer has basis in annuity/retire plan

22

Annuity Formula

Cost of annuity / expected return x payment

Includible amount = payment minus answer above

23

Income: Prizes and Awards

FMV of prizes and awards are income unless for civic, artistic, educational, scientific or literary achievement AND recipient:

1. selected w/o action on own part

2. not required to perform services

3. amount paid directly to tax-exempt or govt. organization

24

Income: Scholarships

Excluded from income to extent that funds are used for tuition, fees, books, supplies.

Amounts for room/board are earned income.

25

Income: Life Insurance Proceeds

Life insurance proceeds due to death of insured = not income.

26

Life Insurance purchased from insured or owner of policy for consideration:

Asset

Proceeds in excess of cost are income

27

Income: Gifts/Inheritances

Not income

28

Income: Forgiveness of Debt

Generally income unless forgiveness is gift/related to bankruptcy

29

Income: Social Security Benefits

Not income unless provisional income exceeds specified amount.

PI = AGI + tax-exempt interest + 50% (SSB)